Friday, October 12, 2012

Dow Theory Update for Oct 12: No changes. Mixed action today

Stocks: Primary trend remains
bullish. Secondary trend bearish.

The Transports
which continue showing good relative strength closed up for the day. The
Industrials closed barely up, and the SPY closed down.

Thus, the secondary trend
remains bearish and until now, the decline has been so timid that not even the
minimum Dow Theory threshold of 3% has been reached. So patience is demanded.

Today volume was bullish,
since the SPY was clearly down and volume contracted. Volume indications remain
mixed, with a slightly bearish bias short term. Again, you can see that volume
supported the primary upward swing (volume increased together with prices) and
has stagnated during this secondary reaction (hence confirming that the current
pullback is nothing more than a secondary reaction and not the onset of a new
bear market).

Here you have an updated chart
of the volume patterns:

Volume suggests that the current pullback is just a secondary reaction, not a new primary bear market

As I wrote yesterday, and this
is the subject for a future post, ca. 70% of the Dow Theory signals are profitable.
If you couple this information with volume (which is saying that we are
experiencing just a secondary reaction), we have to conclude that it is
more logical to say that the primary bull market has still more time to live.

Doubters are encouraged to read my post:

"5 Reasons why I consider the stock market in a primary bull market" which you can readhere

Such post remains fully fresh and valid.

The entire precious metals' universe
had a down day. In silver (SLV) and gold miners (GDX) minor technical damage
was made as the 09/26/2012 lows were violated. Under Dow Theory such violation
is likely to be deceptive as the new lows in silver were not confirmed by gold.
By the same token, GDX new minor lows were not confirmed by SIL. Such law of
confirmation forces me to say that the secondary trend of the precious metals' universe
(Gold/Silver and GDX/SIL) remain bullish. It goes without saying that the
primary trend remains bullish as well.

Furthermore, as far as gold
and silver are concerned, we have to bear in mind that on October 4, both
metals jointly broke out previous highs. Under Dow Theory this was a very
bullish event as it confirmed the primary trend and, additionally, “forced” us
to “reset” the clock in order to count the minimum of 10 trading days for a
secondary reaction to exist. For more details about the importance of such
October 4 breakout, please read this post on this Dow Theory blog.

A final reason which confirms the primary trend in precious metals is the SIL/GDX ratio (red thick line in the chart) which continues solidly bullish (both primary and secondary movement). Normally, bullishness in this ratio reflect strength for the whole precious metals' universe, since when prices decline, it is silver and its miners the first one to take a hit. Here you have an updated chart.

I will insist again that we
are in the business of riding the primary trend. Outsmarting or second guessing
secondary reactions is not our league, since we “use” them (i.e. in order to
set our entry and exit points), but we don’t “trade” them. However, to satiate
our restlessness, I allow myself to say that the technical action under Dow
Theory seems to suggest that the yet to be born secondary reaction in the
precious metals' universe might be stopped in their tracks soon. October 4 was
a clear warning of underlying strength, and today’s divergence seems to show
that the timid pullback may be short-lived. While this may cheer up some of our
readers, this would be bad news. We do need a secondary reaction, so I hope
that at least this time the Dow Theory is wrong when it comes to forecasting
the end of this pullback.

Conclusions: The primary trend
for stocks continues bullish. The secondary trend is bearish but, until now,
the retracement has been timid at best.

Gold, silver and their miners
remain bullish in both the primary and secondary trend, and the odds favor a resumption
of the upward movement, which, contrary to popular belief, would be bad news
for Dow Theorists. If you don’t understand this statement, please read the
following post in this Dow Theory blog: “Why Dow Theory matters: Outstanding
Risk Reward Ratio thanks to the Dow Theory’s trailing stop” which you can
fin here.

Later on this evening, I will
publish the second part of the Special Dow Theory Issue concerning the
"entrails" of this secondary reaction. In such post I will deal with
the thorny issue of whether to buy indices or specific stocks.

About Me

Disclaimer/Disclosure

This blog (dowtheoryinvestment.com) is strictly a personal journal applying my interpretation of Dow Theory principles to the action of the stock market and my musings about investment and trading in general. This blog is intended solely for entertaining, illustrative or informational purposes. I am not a registered investment advisor and neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, option, ETF, mutual fund, currency, commodity, or any other security. I am unaware of any readers personal circumstance, financial condition, risk tolerance or goals and objectives, so nothing read here should be considered advice suitable for them. Anyone reading this blog does so with the understanding that this is strictly meant as an analytical exercise and does not proffer actionable advice in any way, shape or form. Trading and investing always entail risk and possible loss of funds and should only be undertaken after appropriate due diligence by the trader/investor and after consulting a registered investment adviser.